Mon, May 28, 2012, 8:13 PM EDT - U.S. Markets closed for Memorial Day

Trade with your brain, not your emotions

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SLV27.620.18

Making the right trade isn't always fun. Sometimes it feels viscerally wrong.

For instance, a week or two ago while chatting on our InsideOptions Pro form, I quipped: "I don't want to do it and feels terrible, but I am buying more TNA now." (The stock is a leveraged ETF that some of us like to trade for short-term moves.)

Other users on the forum laughed and acknowledged the sentiment. At that particular moment, my intellect told me to expect higher prices because stocks had snapped back from below the August lows and earnings season was approaching.

I had grown accustomed to selling at the top of the range during August and September and had visions of another 2008 collapse. My fears and emotions urged me to take my profits amid strength as the S&P 500 pushed higher.

Instead, I listened to my head and my reasoned expectation of what I thought would happen. I added to my longs and profited nicely--even as other people on the chat unsuccessfully tried to short the move the whole way up.

Both Sun Tzu and Mohammad said that "war is deception." Well, financial markets are at war with your capital and your head. They bob and weave like a prizefighter, trying to lure and confuse us before delivering a knockout punch. Stocks play head games, sapping our conviction to buy or sell at precisely the moment when it makes sense to do so.

A recent case in point: precious metals. Silver collapsed back in May, and I told some trading friends that I thought it was going back to $30 before it returned to the April highs of $47-$48. So what did I do? I sat on the sidelines for most of the spring and summer, then started to doubt my own chart work and eventually tried to get long in early September.

That was obviously a mistake, because silver would soon crash once again, and this time it found support at what price? That same $30 I had coolly and rationally identified several months earlier. (Which, I should add, I liked because it was a peak from last December and January.)

The lesson: We should all try to determine the areas where we're good and stick with them.

(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of Oct. 26.)

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13 comments

  • Iamnotreallyhere2  •  5 months ago
    The Market is 70% emotion and 30% facts. It used to be 50/50. How else do you explain how you can go up 2.5% one day fall 3% the next and then rise the next day. All the while using Europe as the reason for both the high and low.
    • The Dragon Slayer 5 months ago
      Don't forget that computers are making many of these "decisions" and that is a trade-range algorithm. Here's a question for you if computers are set to take profits at 12,250 and buy back in at 11,951 - can the market ever rise (produce long-term gains) again?
  • Sam  •  St Louis, Missouri  •  5 months ago
    #$%$
  • michaelc  •  5 months ago
    I do not trade on what the market MIGHT DO, I trade on what the market IS DOING. The first rule of INVESTING is buy low and sell high. If you can do this you will be a winner. Do not buy when the market is screaming skyward like a jet fighter plane. You should have bought in when the market was low. Just wait. The factors which cause market swings are always 'in play' and the market will calm down and come down so that you can spend your money. It is just like when I was a little kid and rode on the Merry Go Round (carousel). We had to wait for it to come to a stop before we could get on (buy at the low) or get off (sell at a peak). It is really very simple, eh? The only gambling going on is the gamble on how your individual stock holdings will do. And if you pick the good stuff and stay away from the trash, you will probably do very well.
  • phunk  •  5 months ago
    Too many people trade on headline risk and forget one thing: headlines are designed to do one thing, sell ad space. What sells more ad space, doom and gloom or positivity? The US economy is strong, just two headwinds of employment and housing otherwise underlying financial numbers for US Stocks are there. This is why you use a financial advisor. Youre emotional about your money. Im emotional about my money. I am NOT emotional about your money, I am logical. Sadly most people these days dont draw the line between "trading" and "investing" as many people are now attempting to time the market with their 401k's and IRA's, and they choose wrong most of the time.
  • amanda bereckondwith  •  Newark, New Jersey  •  5 months ago
    The market wants to inflict pain? Geez i did'nt realize it was a living entity. More like Hymie and his HFT computers F@#ing with our head because there is no other way to make money but to steal it. They own this board.
  • Bobwl  •  Irvine, California  •  5 months ago
    Definitely, but it's easy to say than to act.
  • curt  •  5 months ago
    Yep you are trading people. And guess what is good at extracting wealth from you??
    COMPUTERS!!!!! Have you put it together. The robots were not brought here by foreign nations to take over the USA. The don't move on dozer tracks and fire machienguns.
    They were made by our countrymen bankers and wall st giants. To extract the wealth of the county and then drop us like a used concubine and move on.
  • Tiger  •  5 months ago
    This a no brainer.
  • Molecule Man  •  5 months ago
    i can't trade my brain. that's the last thing i got. the banks stole everything i had.
  • Tiger  •  5 months ago
    Just never fall in love with any stock.
  • Groover  •  5 months ago
    Jimmy Carter had it right when he said we have become a nation not defined by who we are but by what we have...
    • Wolfgangjr 5 months ago
      And he made sure we had very little of it. My very first financial market crash!
  • Wolfgangjr  •  Raleigh, North Carolina  •  5 months ago
    Media controls the emotions in the market. One day there is fiction in the air, then the next day the world is ending kinda news. The media should be held accountable for the fact, or fiction they print.
  • Scott  •  Orlando, Florida  •  5 months ago
    My brain says the world is doomed. Sell everything. Buy bullets.
    But, my emotions say, PLEASE let it not be true.
    So, I hope and gamble that it is not true.
    Follow my brain and bail on everything ???
    • amanda bereckondwith 5 months ago
      Yes Bullets and MRE's Don't forget your address book with the addresses of the Bernie Madoffs of the world.
 
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